Interest Rates - the cost of borrowing money - made simple.
1. Interest is the cost of borrowing money.
Borrowing money isn’t free. Interest is what you, the borrower, pay to the lender in exchange for them lending you money. The lower the interest rate, the “cheaper” the cost of borrowing the money.
2. A loan used to buy a home is commonly referred to as a “mortgage."
Okay, there is a bit more technical jargon behind all this, but for our purposes, when you hear “mortgage,” think “loan I’m using to buy a home.”
A mortgage generally works this way: a bank lends you money to buy a home in exchange for you paying interest on that loan. You get a house, and the lender makes money every month when you make your house payment.
3. Mortgage terms are unique to each buyer.
Every borrower is unique and certain factors determine what type of loan and terms the borrower is eligible to choose from. A lender can present options based on a variety of such factors.
For example, a lender can discriminate based on a buyer’s credit score, income, debt history, etc. but cannot disciminate based on race, gender, religion, age, ethnicity, etc.
Additionally, there are a range of variables that comprise a mortgage, including the interest rate, the term (or length, the downpayment amount, size of the loan, etc.) based on the financial factors outlined above.
For example, a borrower with great credit, money in the bank, little debt, and a six-figure income will likely receive more favorable terms for their mortgage than a borrower in a less-favorable financial position.
4. Interest rates can change daily.
Interest rates are always changing based on a million different factors in the broader financial market.
When you buy a home, you have the option of getting a “fixed-rate” loan, meaning the interest rate will stay the same for the length of the loan - whether that’s 10, 15, or 30 years. You will also have the option of getting a "variable" interest rate, but that's another article for another time.
If rates improve (get lower) over time, you will have the opportunity to re-finance and get a new loan at those lower rates, thus saving you money.
If rates increase, be happy knowing you don’t have to do anything because your rate is fixed and will stay the same.
5. Higher interest rates weaken your "purchase power."
Most home buyers have an ideal monthly payment in mind when they’re shopping to buy a home. When interest rates increase, that means that a greater percentage of that ideal monthly payment will now go toward paying interest, which means the cost of home they can afford decreases. Here’s what we mean:
[chart courtesy of Land Title Guarantee Company. Shared with permission.]
[BONUS!!!] 6. Talk to a professional.
It’s a loan officer’s full time job to understand how all of this works, be able to explain it to you in a way that makes sense, and give you advice and direction on what type of loan will work best for you.
Interested in learning more? Click the button below to contact a member of the RAGE team, or reach out to Ann Dain with Caliber Home Loans. We’re happy to answer any questions you might have!
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We hope this content serves you well as you seek to be savvy homeowners and make wise financial decisions for your future. If you'd like to chat further or are considering moving in the coming months or year, let's get a meeting scheduled today!
Josh & The RAGE Team
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
